The capital markets of the world have undergone unprecedented transformations during the last decade in response to changing economic, political and financial conditions which have led to closer contacts between the economies of different countries and thus to a largely internationalized capital marketplace. As a result of this global investment environment, traditional investment devices such as stocks and bonds have been supplemented with more versatile investment vehicles. The advent of computerized trading and other forms of advanced information processing has created a new family of investment products, such as commodity options; international capital, real estate, and currency funds; "unmanaged" index funds; financial futures contracts, and other so-called derivative instruments.
In spite of these alternatives, certain investment strategies remain prohibitively expensive to pursue for a number of investors. In particular, many investors employ a technique known as market timing, which involves investing in the equity markets at the perceived time of market growth and divesting at a later time of perceived market contraction. This strategy is usually based on timing the business cycles for the economy as a whole which tends to avoid the risk associated with owning individual stocks. Due to the fact that economic cycles of different countries frequently run in opposite directions, it would be especially beneficial for market timers to participate in a particular capital market for a limited time and to be able to redistribute investments to other markets at appropriate times in the perceived cycles. Despite the globalization of the economic and political ties between different countries, however, there are numerous problems associated with a foreign market trade, so that only a few investment vehicles exist which would allow the investors to participate in the global financial markets at a reasonable cost.
Another investment approach is to seek undervalued stocks. The goal is to counteract the business cycles so that the selected individual stocks, perceived to be undervalued, have an opportunity to appreciate. Such investment approach involves hedging one investment in a perceivably undervalued stock with a countering investment to limit the impact of the business cycle on this stock. Clearly, the investment hedging strategy is best applied on a global scale, which allows the investors to limit their risks. As discussed above, however, such approach is presently not available to most inventors due to the difficulties associated with trading on foreign markets.
Among the various investment options, significant popularity in last years have achieved the mutual funds which offer a variety of investment options tailored to specific customer needs. Different funds are designed to invest in particular types of stocks, in specific industry sectors, or track the performance of broader market indicators. Some funds offer income which is free of federal, state or local taxes, dependent on the residence of the investors. Mutual funds are particularly attractive because they provide the investors with the opportunity to participate in the capital markets for a relatively low fee compared to a direct investment in stocks. These investors' fees are in part used to finance research directed to selecting a specific investment portfolio for each fund.
Recently, professionally managed mutual funds have come under criticism due to the fact that a large number of such funds were outperformed by general equity market indicators, such as the S&P 500 index. The S&P (Standard & Poor's) 500 index is a relative valuation of the stocks of 500 large companies, indicative of the performance of the U.S. equity markets. To some degree, the performance of such funds is determined by the total investments in the fund. Some small funds are capable of focusing on a particular investment strategy which may lead to superior performance over a limited period of time. As the investment return of such funds rises, however, more investors are attracted to the fund, leading to a less flexible investment structure and frequently to a worsened performance. For this reason, many funds are being closed to new investors after they reach certain level of assets.
The unsatisfactory performance of many managed funds has created substantial interest in unmanaged investment products that track the overall performance of the equity markets. Such products include indexed stock funds that invest in the stocks of the S&P 500 companies and, therefore, directly track the performance of the S&P 500 index, unencumbered by asset research fees and transaction costs. Other investment vehicles have been offered to track the performance of select foreign markets.
Several investment products have been proposed in the past in this respect. One approach is represented by the Toronto Index Participation Units ("TIPS"). TIPS is an open end unit trust structure which was designed to follow the Toronto 35 Index.
Another relatively recent approach is offered by the Standard & Poor's Depositary Receipts.TM. ("SPDRs"). The SPDRs are financial instruments devised to package equity into a single listed security. They represent ownership in a SPDR Trust, a unit investment trust which holds a portfolio of common stocks that tracks the price performance and dividend yield of the S&P 500 Index. SPDRs are like open end unit trust that is rebalanced daily to the S&P 500 Index and may trade at a premium or discount to the S&P 500 futures. SPDRs may be held like a stock for a long time and entitle the holder to quarterly cash distributions corresponding to the dividends that accrue to the S&P stocks in the underlying portfolio, less expenses. While the SPDRs provides desirable diversification and convenience, they are only offered in one capital market.
The above-described investment products do not provide the desired diversity and level of service. Notably missing are investment products which track the performance of one or more foreign markets. At least in part, the reason for this lack of financial products is that no financial management system has been able to combine resources such as computer data processing systems, economic forecasts, market models and a global communication network to enable the creation of such products and provide real time analysis and reports on the performance of the financial product. Furthermore, no financial product on the market has been packaged as a debt instrument which in many jurisdictions provides appreciable tax and other advantages to the investors.
It is therefore felt that there is a need to provide an integrated financial management system for implementing investor participation in domestic and foreign capital markets through positions in indexed vehicles which are packaged as debt instruments. The financial management system is to offer a full range of services including administering, monitoring and reporting on the return of the financial instrument, providing investors with cost effective and versatile options to participate in different capital markets.